On Aug 28, we issued an updated research report on steel maker Nucor Corporation NUE.
Nucor’s revenues and profit for second-quarter 2015 tumbled year over year on lower pricing and shipments. Earnings, however, topped the Zacks Consensus Estimate. Revenues fell by double-digits and missed expectations. Nucor anticipates improved earnings in the third quarter compared with the second, based on better performance in its Steel Mills segment.
While Nucor’s strategic investments in a number of projects coupled with its efforts to expand capacity should support results moving ahead, challenging steel market fundamentals continue to weigh on its prospects.
Nucor has invested roughly $6 billion to expand its higher margin product portfolios and improve its cost structure since 2008. Nucor’s Louisiana direct reduced iron (DRI) facility, its largest project, came online in Dec 2013. The $750 million plant is expected to produce 2.5 million tons of DRI annually when the operations are in full swing.
In addition, sheet piling production capabilities expanded at Nucor-Yamato structural steel following the completion of a roughly $115 million expansion project. The Nucor-Yamato joint venture is expected to continue to grow its share in the steel pilings market over the next few years. Nucor is also investing to secure a low-cost supply of natural gas on a long-term basis to cover its expected future steelmaking and DRI production needs.
Moreover, Nucor is seeing strength across end markets such as automotive, energy and general manufacturing. Demand across these end-markets remains healthy. The acquisition of Gallatin Steel Company has also reinforced Nucor’s foothold in the key Midwest market, the biggest flat-rolled consuming region in the U.S.
However, the steel industry is still going through a difficult phase and market fundamentals remains challenging in the U.S. Nucor, like other steel makers, remains plagued by surging domestic steel imports. Consumers in the U.S. are importing cheaper steel from China, forcing domestic steel producers to sell at lower prices. Despite the U.S. steel industry’s low capacity utilization, imports continue to flow into the domestic market due to foreign producers’ overcapacity.
The estimated market share for finished steel imports was as high as 32% of the market in first-half 2015. Significantly high import levels are affecting the performance of Nucor’s steel mills unit.
Moreover, demand for steel is expected to remain subdued in energy markets in the near-term given lower oil prices. While non-residential construction activities are improving, the market remains below its peak levels.
Nucor is a Zacks Rank #3 (Hold).
Other Stocks to Consider
Other stocks in the basic materials space worth considering include ThyssenKrupp AG TYEKF, Denison Mines Corp. DNN and OCI Resources LP OCIR with all sporting a Zacks Rank #2 (Buy).
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